The World Needs Some Chinese Medicine

China might not be your picture perfect country but nobody can deny its importance in the global economy and international trade. China has been dubbed as the fastest growing country over the last several years, making it the third largest economy in the world.

Let me give you a couple of facts:

1.) China hosts a population of almost 1.3 billion people – the largest in the world. That’s a huge consumer market right there!
2.) China is the number one exporter to the US, which is the biggest economy in the world. While the US saves close to zero of its GDP, China manages to save an overwhelming 50 percent!
3.) Despite the financial crisis, China remained one of the top destinations of foreign investment in 2009.

Needless to say, the economic fundamentals of China, with its enormous population of workers and consumers, point to strong growth for years to come in almost every economic outlook.

Just recently, a trade report from China showed that exports soared by 17.7% on an annualized basis in December, its first gain after 14 months. Its imports also posted a stellar number with a monstrous 55.9% jump from a year ago!

Specifically, Chinese exports in December were up to $130.7 billion while its imports also reached $112.3 billion, resulting into an $18.4 billion trade surplus. This amount directly adds to China’s overall GDP. Most notably, its exports to the US and the EU have grown by 15.9% and 10.2%, respectively.

Take note, China has now overtaken Germany as the number one exporter in the world!

Given China’s role in the global economy, their growth also benefits other economies especially its trading partners and the ones that do business with them. For one, China sources their input materials, like coal and iron ore, from countries like Australia and New Zealand. A rise in domestic demand and exports naturally leads to an increase in demand for the input materials as well. I mean, how will they able to supply their finished goods without the raw materials?

In fact, Chinese imports from Australia have more than doubled over the past year. Another point is that the richer China gets, the better it is for countries like Germany and the US that gives services to them in terms of infrastructure and technology. Of course, China will require more infrastructures like roads and plants. They will also demand more machinery for their production.

China is far from unstoppable though. It turns out China’s central bank is expecting consumer and producer prices to continue rising after the recovery of most major economies resulted to a pickup in global demand. Rising price levels would make China’s exports relatively more expensive, thus, dampening the demand for Chinese products… and China wouldn’t want that, right?

Just last week and without prior notice, China’s central bank caught the markets off guard by raising the interest rate on their three-month bills for the first time in nearly five months. Although this interest rate is different from the bank’s benchmark rate, investors took the 0.05 percentage point hike as a sign that more rate hikes are on the horizon.

It seems the China’s central bank is encouraging central banks to purchase these bills, effectively reducing the money in circulation and therefore curbing inflation. By keeping a tight lid on inflation, domestic price levels are kept low and China’s products retain their competitiveness in the global market.

While the Chinese currency isn’t considered a major currency (kind of weird, if you ask me!), the developments in its economy will have long lasting effects on the prices of other currencies. As I’ve mentioned above, China plays a crucial role in global trade. This is why traders and investors closely watch whatever happens in China.

If China continues to grow, we may see other major economies prosper as well. Now what would that mean for currencies from countries that rely heavily on Chinese demand? Well, in order for Chinese companies to import from other countries, they will need the currencies of those countries! This in turn, could effectively boost the price of these currencies! That’s why we see the Aussie and the Kiwi rise whenever upbeat reports from China are released.

A possibility of future rate hikes (central bank bill and/or benchmark) to prevent a high level of inflation will put a cap on China’s growth. Still, even if China’s expansion tapers off a little, we have to remember that China posted a near double-digit growth of 8.9% in the third quarter of 2009! Any reduction from this figure would still be better than that of the other economies. And as long as China continues to develop, expect the other nations, particularly Australia, New Zealand, and Germany, to do so as well.

About Forex Gump

I throw macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully, the final product are lessons about the FX market that's easy to understand.

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